Crescent Capital BDC (CCAP) Q3 2025: Tariff-Driven Losses Cut NAV by $0.27, Dividend Coverage Remains Intact

2025-11-13 | By EarningsIQ Research

Tariff-related portfolio markdowns pressured Crescent Capital BDC’s net asset value this quarter, yet the company maintained strong dividend coverage and stable net investment income. Management’s focus on core and lower middle market lending, along with prudent risk management and sponsor-backed deals, positions CCAP to navigate a shifting rate and credit environment. Looking ahead, leadership expects to defend the dividend through portfolio growth and increased fee income amid a more accommodative rate backdrop.

Summary

• Tariff Headwinds Surface: Portfolio markdowns linked to tariffs drove a sequential NAV decline.
• Dividend Coverage Holds: Net investment income continues to exceed the regular dividend.
• Pipeline Set for 2026: Management targets growth levers and fee income as rates ease.

Performance Analysis

CCAP’s third quarter results reflected a stable income profile but revealed cracks from external pressures. Net investment income per share held steady, comfortably covering the base dividend for the thirty-ninth consecutive quarter. However, net asset value per share dropped to $19.28 from $19.55, primarily due to realized and unrealized losses on select portfolio companies exposed to tariffs. These markdowns, totaling $0.15 per share, highlight the vulnerability of certain borrowers to trade policy shifts, even as management emphasized that overall tariff exposure remains contained at 4% of the portfolio.

Portfolio composition remains anchored in first lien loans (90%), with a high degree of diversification across 187 companies and an average position size of 0.6%. The top ten borrowers account for only 16% of portfolio value, underscoring CCAP’s disciplined approach to risk modulation. Non-accruals improved to 1.6% of fair value investments, down from 2.4% last quarter, and the vast majority of the portfolio continues to meet or exceed underwriting expectations. While gross deployment lagged aggregate exits, management attributed this to timing, with several commitments expected to close in the fourth quarter.

• Tariff-Linked Losses: $0.15 per share in markdowns tied to two companies facing tariff-driven operational challenges.
• Stable Core Income: Net investment income again exceeded the dividend, with 110% coverage.
• Risk Ratings Remain Conservative: 87% of portfolio at or above underwritten expectations; watch list approach remains proactive.

Despite these headwinds, CCAP’s underlying portfolio fundamentals remain resilient, supported by sponsor backing, cash flow orientation, and tight credit documentation.

Executive Commentary

Strategic Positioning

1. Core and Lower Middle Market Focus

CCAP’s business model centers on originating and leading private credit transactions in the core and lower middle market, where structural protections and documentation discipline are stronger than in the upper middle market. This segment focus enables CCAP to maintain tighter covenants, enhanced monitoring rights, and better risk-adjusted yields, even as competition and spread compression intensify industry-wide.

2. Sponsor-Backed Lending Model

Nearly all of CCAP’s debt investments (99%) are sponsor-backed, providing a layer of governance and financial support beneath each loan. This approach is intended to insulate the portfolio from governance failures and bankruptcy risk, as evidenced by the company’s avoidance of recent high-profile sector bankruptcies. Weighted average loan-to-value at underwriting remains conservative at 40%.

3. Portfolio Diversification and Risk Management

CCAP continues to emphasize portfolio diversification, with no outsized borrower concentrations and a policy of preemptive risk rating downgrades. The company’s watch list, which includes 13% of investments at fair value, is managed more conservatively than many peers, reflecting a transparent and proactive risk culture.

4. Balance Sheet Optimization

Capital structure flexibility is a strategic lever, as management refinanced $185 million in senior unsecured notes, extending maturities and reducing funding costs. With net leverage at 1.20 times (below the 1.30 target ceiling) and $240 million in undrawn capacity, CCAP is positioned to selectively grow the portfolio as market conditions warrant.

5. Readiness for Rate and Fee Income Shifts

With roughly half of borrowings floating rate, CCAP expects funding costs to adjust downward as base rates fall, partially offsetting lower asset yields. Management is also targeting increased origination and structuring fees as M&A and refinancing volumes recover, which could supplement declining interest income.

Key Considerations

This quarter’s results underscore the balance of resilience and emerging risk in CCAP’s model. The company’s focus on sponsor-backed, first lien lending in the lower middle market remains a defensive anchor, but tariff-driven markdowns and industry-wide spread compression introduce new uncertainties for 2026.

Key Considerations:

• Tariff Exposure Remains Contained: Management’s analysis indicates only 4% of the portfolio is directly vulnerable to tariffs, with most borrowers demonstrating adaptability through pricing and supply chain shifts.
• Dividend Sustainability Prioritized: Net investment income and spillover income ($1.10 per share) provide cushion, but ongoing coverage will depend on portfolio growth and fee generation as rates decline.
• Spread Compression and Competition: While CCAP maintained origination spreads near 500 basis points, management acknowledges that competition and lower volumes are squeezing risk premiums industry-wide.
• Fee Income as an Offset Lever: Non-interest income is currently below historical norms, but management anticipates a rebound as deal activity picks up in a lower rate environment.

Risks

Tariff and trade policy volatility present a persistent risk, as evidenced by this quarter’s markdowns. Spread compression and intensified competition in the lower middle market could further erode risk-adjusted returns. Should interest rates fall more quickly than expected, net investment income may come under pressure, testing management’s ability to maintain dividend coverage without dipping into spillover income or taking on incremental risk.

Forward Outlook

For Q4 2025, CCAP guided to:

• Regular dividend of $0.42 per share, maintaining a 9–12% yield based on NAV and market price.
• No supplemental dividend for Q4, as excess available earnings did not meet the threshold.

For full-year 2025, management maintained guidance:

• Dividend coverage expected to remain at or above 100% via net investment income and targeted portfolio growth.

Management highlighted several factors that could shape 2026:

• Potential for increased origination and structuring fees as M&A activity rebounds.
• Flexibility to grow the portfolio within leverage targets, leveraging Crescent’s broader platform pipeline.

Takeaways

CCAP’s quarter was defined by a blend of stable core earnings and isolated but material tariff-driven losses. The company’s proactive risk management, conservative leverage, and sponsor-backed approach remain strengths, but future quarters will test the ability to offset yield compression and defend the dividend as rates ease.

• Tariff-Driven NAV Decline: Portfolio markdowns highlight the need for ongoing vigilance on trade policy risk, even in diversified portfolios.
• Dividend Defense Hinges on Growth: Management’s ability to ramp portfolio and fee income will be critical as base rates fall and competition intensifies.
• 2026 Activity Watch: Investors should monitor origination volumes, non-interest income trends, and any signs of broader credit deterioration as macro conditions evolve.

Conclusion

Crescent Capital BDC remains a disciplined operator in a challenging environment, with strong dividend coverage and a conservative risk posture. However, tariff-driven losses and spread compression signal that active portfolio management and new income levers will be essential to sustaining returns in 2026.

Industry Read-Through

CCAP’s results reinforce several key trends for the private credit and BDC sector: Tariff and trade policy risk is not fully diversifiable, even in highly diversified portfolios. Spread compression and competition are squeezing returns, especially in the lower and core middle market. Sponsor-backed models remain a defensive differentiator, but the ability to generate fee income and maintain underwriting discipline will be tested as deal volumes recover and rates fall. Peers with less conservative risk management or higher non-accruals could face sharper NAV and dividend pressure in the coming quarters.

CCAP Financials Business Development Company Private Credit Dividend Tariffs Middle Market